2023-10-13 08:44:31 ET
Summary
- MGM Resorts shares have fallen almost 30% from their 2023 share price high of $51.35 on July 31st.
- The current share price is greatly affected by the September 14, 2023, Scattered Spider hacking group announcement that had infiltrated MGM’s systems, creating significant operational and gaming system outages.
- Regardless, my five-step analysis of macro, sector, valuation, technical, and brand discovery posits that MGM is positioned for growth from increased post-Covid tourism, sports betting, and online gaming.
- I recommend the MGM shares as a risk-on buy.
Investment Thesis
The MGM Resorts International (MGM) share price is 30% below its 52-week $51.35 high, primarily due to a witches brew of excessive corporate debt, an incurred cyber-hack, and a possible employee strike. However, these downside events are offset by the company's acceleration into sports betting and online gaming, coupled with improving consumer visits -both in volume and dollars spent -in Las Vegas. I believe the ~ $37 share price has bottomed or near-bottomed, giving the investor a high risk - high reward opportunity.
Thesis Support Methodology
My MGM evaluation descends through five key factors: Macro, Sector, Valuation, Technical, and Brand discovery. The interlock of all five components contributes to my conclusion and recommendation.
Given the target-market of MGM's value proposition is the consumer, an important reference point toward any stock recommendation is consideration as to whether the economy is lending itself to a bull or bear cycle. Generally, a weak economy ignites a bear market and main street spending pullbacks. Next, I review MGM's sector strength, particularly as it relates to post Covid visitor traffic to Las Vegas resort and casino properties. From sector observations, I then investigate MGM's results in five critical valuation measures: Price Earnings multiple ((FWD)), Price to Sales, Operating Margin %, Enterprise Value to Free Cash Flow, and Debt to EBITDA. These five metrics succinctly address Income Statement, Balance Sheet, and Cash Flow results. I further include an estimated share price range in a times-EBITDA model (notwithstanding that resorts & casinos typically utilize EBITDAR as a standard reporting measure ). Next, I review share price momentum given key technical indicators. In the final review piece, I explore the brand's leadership, vision, and direction: are these three components collectively meaningful to share price appreciation?
Overview of MGM Resorts International
MGM is a Las Vegas headquartered hotel and casino entertainment colossus, including a 50/50 venture with Entain (plc) that commenced in 2018, BetMGM, to offer U.S. sports betting and online gaming, and LeoVegas which offers sports betting and online gaming throughout Europe. Additionally, MGM is pursuing expansion in Asia and a resort opportunity in Japan.
MGM reports its revenue streams in three groups:
- Las Vegas strip: 37,293 rooms, 9 properties, 65% of revenue
- Includes the well-known Las Vegas properties as Aria, Bellagio, Excalibur, Luxor, Mandalay Bay, New York New York, Park MGM, The Cosmopolitan, and of course, the world's largest hotel, the MGM Grand with over 6,700 rooms.
- Regional: 6,563 rooms, 8 properties, 30% of revenue
- This non-Vegas USA property group includes the Borgata in Atlantic City, New Jersey and Beau Rivage in Biloxi, Mississippi.
- MGM China: 2,003 rooms, 2 majority owned properties, 5% of revenue
MGM detected a major breach of its computer systems on September 10, 2023; ironically, the impact of such a threat was noted in their 2022 Annual Report: "The failure to maintain the integrity of our computer systems and customer information could result in damage to our reputation and/or subject us to fines, payment of damages, lawsuits and restrictions on our use of data ."
MGM confirmed the cyber-attack on October 5th and advised the breach could affect its Q3, 2023 reporting by $100M.
The Macro Outlook: Regardless, People Want to be Entertained
I simplify the macro exploration to seven agents to broadly illustrate whether we are in a bull or bear cycle. Specific macro targets are derived from a ten-year analysis (2012-2021) of key indicator datapoints.
The macro review begins with the Presidential Approval rating, a broad sentiment indicator that captures how people feel about the country's general direction, and per ABC News/ FiveThirtyEight, it currently aggregates to a 40% approval.
Both the Consumer Price Index ((CPI)) and Unemployment rate are monthly issuances from the U.S. Bureau of Labor Statistics ((BLS)), an agency of the Department of Labor. The year over year CPI sits at 3.7% for September, 2023, identical to August, and up slightly from July's 3.2%. At 3.7%, the CPI is considerably above the Federal Reserve's Federal Open Market Committee's ((FOMC)) 2.0% target. September's Unemployment rate was 3.8%, unchanged from August.
Our fourth macro indicator is the annualized, quarter over quarter rate of Gross Domestic Product ((GDP)) growth from the U.S. Bureau of Economic Analysis, an agency of the Department of Commerce, and it advises that for Q2, 2023, the annualized rate is 2.1% as compared to Q1's 2.2%.
A key macro indicator is the yield difference of the 10-Year Treasury Constant Maturity Minus 2-year Treasury Constant Maturity treasuries, and it currently sits at a negative 30 points .
This inversion of the 2-year yield being greater than the 10-year yield is often a harbinger of a recession. Furthermore, rising treasury yields support the "higher for longer" interest rate mantra as investors re-price their expected returns.
Our second-last indicator is the price of a barrel of crude oil ((WTI)), sitting at $86.38 on October 9th, a 4% jump arising from the Hamas attack on Israel 48 hours earlier. My correlation analysis of ten years of WTI pricing to stock market bull conditions reveals that WTI in the $55 to $80 range is healthy for the market and sufficient for producers.
The China Purchasing Managers Index ((PMI)) concludes our macro analysis and its importance is noted due to U.S.- China trade being almost $700 billion/year. Moody's Analytics advises that the September PMI was 50.2, up from August's 49.7 .
Macro Summary
The seven macro datapoints reveal the following: an improving, but still fragile economy weighed down by inflation and geo-political concerns. On the plus side, although the FOMC raised the Federal Funds Rate six times in 2022 (4 x .75%, 1 x .25%, 2 x .50%) and four times thus far in 2023 (4 x .25%) to a current 5.00% - 5.25% range, many believe the dot plot's steady ascension since March 17, 2022, may be nearing its apex. Overall, macro conditions, as illustrated in Figure 1, portray an economy that's in a bull versus bear tug-of-war.
Figure 1: Macro Register (Created by Author)
Sector Review: Post-Covid Consumer Entertainment Dollars Exist
MGM operates in the Resorts & Casinos industry of the Consumer Cyclical sector. The entire sector, as the name implies, is subject to elastic consumer demand. Accordingly, sector cohorts attempt to smooth demand peaks and troughs through geographic expansion, broader service offerings, and targeted client loyalty programs. The larger players present business models that mix hotel properties, gaming, and sports-betting.
Per Statista, total sports betting in the USA grew from $.4B in 2018 to $7.6B in 2022 as an increasing number of states legalize the industry: the opportunity is not even close to saturation as only 30 of 50 American states authorize sports-betting .
Also, fresh opportunity arises with global online gambling. Grand View Research estimates the 2022 market size at $63.5 billion with an 11.7% ((CAGR)).
Las Vegas is the resort and casino revenue leader in the USA, and its 2019 visitor attendance was 42.5M, falling to 19.0M during the heaviest Covid affected year of 2020, and on track for 40.8M in 2023, with an estimated 25% rise in revenue from 2019 to 2023 .
Figure 2: Las Vegas Annual Attendance (Assembled by Author from Las Vegas Convention and Visitors Authority Database)
The Las Vegas Convention and Visitors Authority reports that the Average Daily Room Rate for August, 2023, was $159, a 7% increase from August, 2022.
Sector Summary
Today, the Resort and Casino industry success is mostly driven by the volume of customers at its properties; higher demand equates to both higher prices and improved scale of resources and human capital. Current customer volumes suggest the industry is now out of the Covid vortex. Online gaming and sports betting are in their infancy and the global opportunity is large.
Near-term, MGM must contend with contract negotiations that began October 3 with the Culinary and Bartenders Unions. Strike disruptions to MGM operations would be seriously impactful as the firm gradually emerges from the Covid challenge.
Valuation: MGM is Weak Value
Base valuation metrics for MGM include a PE FWD at a high 25.6 and a low-confidence Price to Sales of .96, in comparison to the broader market S&P 500 averages of 19.2 and 2.5 .
MRO's Operating Margin of -8.5% (inclusive of a $234M operating loss from BetMGM) and its Enterprise Value ($41.1B) to Free Cash Flow ($1.2B) of 34.3 are both poor. The company is heavily weighed down by its long-term debt ($7.4B) and capital lease obligations ($25.1B), leading to a Debt to EBITDA of 16 times, a Debt to Equity ratio over 600%, and an Enterprise Value that's a whopping 3 times its Market Cap.
Reading the above paragraph would support walking away from MGM, but there are three upside valuation factors:
- In each of March, 2022 and February, 2023 (coincidental with a dividend suspension), MGM's Board of Directors announced a $2B stock re-purchase plan .
- The company's revenue per share is virtually equal to its October 9, 2023 share price, as shown in Figure 3 with comparisons to Caesars (CZR), Wynn (WYNN), DraftKings (DKNG), and Penn (PENN).
Figure 3: Cash Generation (Assembled by Author from Yahoo Finance on Oct. 9)
- Figure 4 forecasts the company's share price range through an Enterprise Value built from EBITDA less Net Debt.
Figure 4: Possible Share Price (Assembled by Author from Yahoo Finance on Oct. 9)
Furthermore, through more disciplined capital management, FCF increased 12% from $883M in 2021 to $991M in 2022 and reached $1.2B of FCF over the last 12 months.
Valuation Summary
MGM's Income and Cash Flow statements are troublesome and its Balance Sheet is awful. The company is attempting financial repairs through share buybacks and implementing an "asset-lite" business model that sells properties and retains usage through leasebacks; the 2022 Annual Report advises that long-term debt declined from $13.4B as of December 31, 2021 to $8.4B as of December 31, 2022 .
MGM beat on EPS in Q1 ($.44 vs $.10) and Q2 ($.59 vs $.54); their Q3 ER will arrive on November 8th .
Technical: MGM Has Troughed?
The MGM ((RSI)) of 50 on October 10 suggests further selling pressure, which is supported by the MACD crossing below the signal line and the share price bouncing off the upper Bollinger band. The October 9 closing price of $37.18 is below the 50-DMA of $41.90 and the 200-DMA of $42.30.
The put/call volume ratio of .54 and a short ratio of only 4% could be interpreted that expectations are for the share price to stabilize but note that the open interest put/call ratio is 1.33: definitely bearish sentiment.
Technical Summary
MGM's share price is in the centre of its twelve-month range of $29.57 to $51.35. Figure 5 reveals a succession of lower highs over the last three months. There is no current momentum favoring the MGM share price.
Figure 5: MGM Share Price to Oct. 9 (Seeking Alpha)
Figure 5: MGM share price, last 3 months, Seeking Alpha, Oct 10, 2023
Brand: MGM is a Leader
MGM's vision is to be "the world's premier gaming entertainment company" through its "five pillars" of strong people and culture, being customer centric, achieving operational excellence, enacting disciplined capital allocation, and providing innovative entertainment. MGM has an experienced executive team, led by President, CEO, and Director, Mr. William Joseph Hornbuckle, that was quick to move into online gaming and sports betting. In 2017, MGM was welcomed into the S&P 500.
Brand Summary
The last 24 months show the brand has work-to-do, especially on operational and capital matters. Topline, the company appears to be on the right path, it's the proverbial under-the-hood that is concerning.
Overall Conclusion: MGM is A High-Risk Buy
Current macro and sector reviews lean to upside share price movement; however, valuation and technical analyses over-ride a near-term upward move in the share price. Furthermore, the possible union strike could affect the company in a material way.
Regardless, I'm impressed by the company's moves to supplement its properties with digital entertainment, the increased visitations to its properties, the asset-lite plan, and the price-making strength exhibited over the last twelve months; consequently, I believe the share price has bottomed and a ((PT)) of $50 is supportable. I suggest easing into MGM with a series of purchase tranches as part of a diversified portfolio. I note that 17 Analyst ratings are spread among 4 Strong Buy, 9 Buy, and 4 Hold.
For further details see:
MGM Resorts: A High-Risk High-Reward Opportunity